Visualizing the Economy

I will be teaching first year economics this fall for the first time in quite a number of years and I want to provide a more gripping visual presentation of what an economy is. I have the standard set of graphs illustrating the circular flow and the production possibilities frontier in order to provide the basic concepts of the economy as a system, scarcity and opportunity cost but I want something simpler to start with on the first day of class. I want a more abstract representation of what an economy is and what changes over time can mean. Here is what I have been experimenting with as I put together the slides for my first lecture.

I am thinking of representing the entire economy as simply a circle of potential output with a given radius. (See Figure 1) That is, the maximum value of goods and services that can be produced by an economy at a point in time is a circle. The circle assumes a given amount of capital, labor and natural resources as well as a given technology and institutions. Within this circle are two other circles – the first is a circle that represents the circle of actual output. If resources are being used less than efficiently, then this circle is within the circle of potential output. Within the circle of actual output is another circle marking the distinction between market and non-market activity. I am assuming that you can provide a measure of the value of non-market activity. The blue area is generally what we see when we talk about GDP – the market value of all the goods and services produced by an economy.

I think it might be useful to set up this diagram on the very first day of class to provide a very visual depiction of what the economy is. This circle of potential output encompasses all of the possible activity that an economy is capable of. The size of the areas within the circle is a function of the degree of efficiency, the types of institutions, the size of the informal economy and how accurately we can quantify and measure market activity.

Growth in economic activity can first be thought of as becoming more efficient – that is, better using the resources you have so that the circle of measured actual output expands outwards and eventually coincides with the circle of potential output. Once efficiency has been achieved, then increases in capital, labor, natural resources and technological or institutional change expand the size of the circle over time (See Figure 2). Of course, the process can also work in reverse if there is a reduction in capital, labor, resources, a decline in institutional quality or technological regress.

I suppose a sequence of increasing and decreasing circles (bubbles?) can be used to depict the business cycle, while the circular nature of the economy natural leads into distributional questions of how the “pie” is divided. If the economy converges to a single point, I suppose we could possibly also start discussing when does an economy exist. Is an economy simply a “big bang” in output space? I digress. Anyway, this is a work in progress.

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Thanks for sharing your ideas.

My reaction was confusion. The area of a circle always contains the pi term which makes data translation more difficult. Also, non-market activity is included in the measured circumference which seems like a non-sequitur because non-market activity seems to be not measured by definition.

I think of the economy as two dimensional, measured by prices and activity. Any one year is an area as you suggest. Your sequence of larger circles to represent an expanding economy was immediately clear to me. My own preference would be an increasing series of rectangles to indicate that either of two dimensions can change to increase the economy size.

Best you teach the class. I would certainly have the students confused!

From a cognitive and pedagogical standpoint, my question is where is the familiar? What relates to what the students already know, to where they are?

Simple does not mean easy to understand. For instance, I know a physicist whose view of the cosmos can be reduced to a single equation:

0 = 0 .

;) Obviously, you need to know a great deal of physics to understand that.

The idea of potential output is not an easy one to grasp. For a mechanical system, if you know the input to the system, you know the potential output, but there is no such shortcut for an economy. What about measured output? The output of non-market activity does not show up in GDP. So what is the first diagram about? How can students understand it?

Why is Figure 1 a series of circles? What does the second dimension add? Are you introducing the idea of different allocations in Figure 1?

The core idea of the first figure is a simple bar. We have "stuff we do that isn't market activity," "stuff we do that is market activity," and "stuff we can potentially do."

"Stuff that isn't market activity" includes all the ways we choose to spend our time that isn't for cash, like cleaning house. "Stuff that is market activity" involves things that are transactional, usually involving cash -- such as building a vacuum cleaner. "Stuff that we can potentially do" involves the limit of efficient allocation: if we buy a vacuum cleaner (market activity!) we're far more productive at cleaning house (non market activity!), so we can do more stuff in less time (stuff we can potentially do!).

In the vacuum/house-cleaning economy, that's the end of it. We get to circle-like shapes when we have different, competing goods, and growing more bananas means fewer apples.

For Figure 2, if you want economic growth then you first should introduce the idea of investment. An apt metaphor is a farmer's field: by holding some seed back from the harvest, the farmer is able to plant more land the following spring. Bad harvests, poor planning, or birds can all cause the farmed acreage to fall between years, even if the desire is for growth.

Potential output is affected by how the pie is divided.
The productivity that determines potential output is not a horse that just runs free whenever it can. Among other constraints, it has a demand constraint. Demand can actually keep the market activity from reaching potential output as you have it defined in figure 1. This is Keynes' idea of effective demand. So I would suggest that figure 1 include a demand dynamic.

This is very confusing. It would be better to just show a line graph of log GDP and an outward shifting ppf. It illustrates how GDP growth is more than more money. It's more possibilities. Finish it off with a comparison of Shanghai now and 30 years ago.

Otherwise don't try to reinvent the wheel. There's lots of great and entertaining intro content online. Be a curator of fun economic content. Creating it isn't you're comparative advantage.

I've always wanted a good visualization what you're trying to get at in figure 1. My point of departure, however, would be Herbert Simon's famous green-line/red-line idea (http://www3.udg.edu/fcee/professors/nboccard/micro2/part1/Simon.pdf). Plus it would have to be animated. Needless to say, I haven't got around to making this yet, so consider this my fantasy powerpoint: The idea would be to start with Hobbesian state of nature, where no one cooperates with no one (so you'd have hundreds of little people). Then you start layering on lines, showing different relations of cooperation arising between individuals, such as division of labour. You start with "high trust" relations, like family production (along the lines that Fukuyama describes in Trust). You then add in hierarchies (the rise of the state!) -- some other colour lines, but organized into pyramids. Then you add in trade relations (markets!) -- another colour -- initially between states, but then you start to import them into the domestic economy (the Karl Polanyi story, the rise of capitalism), and the hierarchies start to break up -- the big pyramid breaks up into lots of little pyramids (firms!), but you keep a bit of the state, which then grows over time (the welfare state!)...